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Why does the biggest quarterly decline in four years for gold do not mark the end of the bull run


After the biggest quarterly loss since 2016, gold is one of the few lower-traded commodities this year, but prices are still likely to move higher even as the global economy continues to recover. and the pandemic is coming to an end.

“Gold has played its typical role as an insurance against market disruption,” said Frederic Panizzutti, head of the organization’s sales division and central bank at the precious metals trader MKS. and as a haven.

“In the last year, the markets had very little picture surrounding the Covid-19 crisis, and it is not known when a vaccine will be available or how often will lockdowns or limited travel. the border will stretch. “Amid uncertainty, the market needs some sort of financial anchor, a safe haven – and gold seems to be the answer.”

Gold futures contract
GC00,
-0.82%

GCM21,
-0.82%

grew by almost 25% by 2020, their biggest annual increase in a decade. So far this year, metals trade about 7% lower, after losing 9.5% in the first quarter, falling overall uptrend in commodity prices.

The metal is already available, but “is not in the right place at the right time, and the premium increases in some parts of the world” as investors are looking for the physical metal, Panizzutti said, adding that it “remains scarce in some parts of the world. “

From March 2020, through the third and fourth quarter of that year, demand for gold and prices increased sharply in the US and Europe, said Kevin Rich, global gold market advisor at the Perth Mint.

During the same period, “demand for gold was very low” in Asia and gold was traded at a discount across Asian markets, he said.

This year, “we have seen a reversal of this, with decreasing Western investment demand and falling prices, while the Asian market has turned to premiums and demand has grown sharply.” .

Without the dynamics between the East and the West, he said, the price of gold would be more volatile and weaker.

Much of the fall in gold prices this year is attributed to the appreciation of the US dollar
DXY,
+ 0.17%

and treasury income
TMUBMUSD10Y,
1,663%
.

“Investors turn to Treasury products to get a return on their investments,” said Panizzutti. Increased bond yields could dampen an investor’s interest in unprofitable gold.

According to Panizzutti, a contributor to the loss of gold is an increase in confidence in the economic growth outlook in Asia, mainly China and in the US, which “started faster and earlier. as expected before ”, reduces appetite for gold.

In the future, gold prices are likely to rise if the stock market softens and volatility increases, Perth Mint’s Rich said.

That could happen if interest rates rose faster than the market expected, if the Federal Reserve finds the pandemic “weakening and begins to withdraw their support, or if inflation rises in a sustained way. stronger than the Fed’s prediction ”.

If there are signs that the pandemic is ending, “we’ll see the real impact of major stimulus spending by US and global governments,” said Rich. That can lead to an increase in gold because debt expansion threatens to undermine the spending value of the dollar.

On how high prices can rise this year, Panizzutti believes that “quite likely” gold can return to the level of $ 2,000 / ounce this year. It settled at $ 1,758.20 on April 8.

The “major emergency” stimulus and subsidies introduced into the global economy over the past 12 months have resulted in “very significant monetary expansion”, he said. Paper money can “depreciate over time and affect purchasing power in major economies,” and gold will then become a “good hedge” against that loss of purchasing power.

“We don’t believe that the bull run will end,” said Panizzutti.

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